Optimal Choice: Maximizing Utility within Budget Constraint

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What is the consumer's problem when making a choice?

Maximizing satisfaction (utility)

In the context of the text, what does the budget line represent?

Expenditure limit

What does the consumer need to do to achieve the optimal choice according to the text?

Maximize satisfaction (utility) within the budget constraint

Which basket should the consumer choose to maximize utility within a $800 monthly budget constraint?

Basket A

What happens to baskets located outside the budget line in terms of affordability?

They are not affordable

At the optimal basket A, what relationship exists between the slope of the indifference curve U2 and the slope of the budget line?

They have a negative reciprocal relationship

What is an interior optimum in consumer choice theory?

When the indifference curve is tangent to the budget line

In consumer choice theory, what does it mean when the budget line and an indifference curve are tangent?

The consumer is maximizing utility while staying within the budget constraint

What is the significance of selecting basket A over B, E, or C for a consumer who wants to maximize utility within a budget constraint?

Basket A achieves a higher level of utility than B, E, or C

What is an expenditure minimization problem in consumer choice theory?

Minimizing total spending while achieving a given level of utility

When does an optimal choice result in corner points in consumer choice theory?

When one good is not being consumed at all

What does it signify when the slope of an indifference curve at a point of optimal choice equals the slope of the budget line?

The consumer is maximizing utility at that point

If a consumer's marginal utility per dollar spent on food is higher than on clothing, what is the likely effect on the consumer's purchasing behavior?

The consumer will purchase more food and less clothing.

In the context of optimal choice, what does it mean when a consumer reaches a corner point?

No further substitution is possible.

When the slope of the indifference curve and that of the budget line are different, what type of optimal choice situation is likely present?

Interior optimum

In a situation where a consumer views two goods as perfect substitutes, what does it mean if the marginal rate of substitution (MRS) is 2?

The consumer values one good twice as much as the other.

If the price of chocolate ice cream is three times the price of vanilla ice cream, which type of ice cream will Sara buy if she views them as perfect substitutes?

Sara will buy only chocolate ice cream.

When a consumer reaches an interior optimum, what does this imply about their consumption pattern?

The consumer is maximizing utility given the budget constraint.

Learn about interior optimum in consumption theory where the optimal consumption basket is at a point where the indifference curve is just tangent to the budget line. Understand how to maximize utility while living within a budget constraint.

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